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RMIN 2005 Final Review Questions and
Correct Answers
Insurance works because Ans: Of the affect of the Law of Large
Numbers
Assume you are comparing the riskiness of two risks your
organization faces: employee theft and products liability. Looking
at the past 30 years, the average annual loss for employee theft is
$25,000, for products liablility it is $7,000. The variance for
employee theft is $2,000 and for products liability, the variance is
$4,000. What two numbers will you use to most accurately
compare the riskiness of these two exposures? Ans: .08 for
employee theft and .57 for products liability
Private insurance is NOT designed to effectively protect insureds
against which type of risk? Ans: Fundamental
Frequency times severity is equal to Ans: Expected loss
The presence of the law of large numbers is critical to the success
of the business of insurance. Ans: True
You are comparing two different exposures to risk that your
business faces: your building burning and your building flooding.
Based on information you gather from your history and that of
similar nearby businesses, you calculate that your expected loss
for your building burning is $80,000 and the expected loss of your
building flooding is $12,000. The variance of your building
burning is $10,000 and the variance of flooding is $11,000. Which
exposure is riskier and why? (Choose the best answer) Ans:
Flooding because it has a higher relative variance
Who generally pays for fundamental risks (directly)? Ans:
Government
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If you are risk averse about driving (select the best answer) Ans:
We can say that you have a higher subjective risk when you drive
Which of the following IS TRUE of the law of large numbers in
terms of loss exposures? Ans: It means that an insurance
company can more efficiently assume risk than individuals
Fundamental risk is diversifiable. Ans: False
Making certain that a catastropic loss does not force your firm into
insolvency is Ans: The post-loss objective of survival of the firm
Which two requirements of an insurable risk does satellite risk
most likely violate? Ans: Large number of homogeneous exposure
units and chance of loss should be calculable
Alex has a 5 year old car that was wrecked last month. He repairs
his car and gets indemnified from his insurer (less his deductible).
But now he wants to get a new car and sell his current one but he
can't sell it for as much he thought since it has been wrecked.
However, he discovers he can actually get as much for it from the
insurance company as he could have gotten before it was wrecked.
This most clearly Ans: Could result in a moral hazard loss
From the video, Dr. Berry noted that insurance companies have
developed many of these specifically to help risk managers and
business owners identify loss exposures for specific industries or
types of organizations. What are they? Ans: Survey form
Considering how aggressive or conservative an individual or
company is with respect to risk should be part of which step of the
risk management process? Ans: Setting your pre-loss objectives
The modern approach to risk management that focuses on
managing not only pure but also speculative risks is commonly
known as Ans: Enterprise risk management
© 2025 All rights reserved
, 3 | Page
Having your brakes inspected and maintained is, according to the
video, an example of which of the following? Ans: a. Loss
reduction
b. Loss prevention
Which method of identifying loss exposures can help the risk
manager identify specific property values of the firm and the
ability of the firm to retain risk? Ans: Financial statement analysis
What type of loss exposure is the loss of business income that
results from not being able to continue running your business
because of a fire? Ans: Property
To be the most conservative, companies would insure their
property (as close as possible) to what level of loss exposure? Ans:
The maximum possible loss
Bobby works for a lone shark and he wants to buy liability
insurance before going to"put the fear" into his boss's client. He
wants to protect himself from his boss's suing him for his medical
bills. His insurance agent tells Bobby that insurance is not
available for this risk because, in addition to the loss not being
fortuitous, there would not be Ans: Legal purpose
Jacob sold his house to Shelia for $140,000 in cash. Jacob threw in
insurance on the house as part of the deal and did not bother
telling the insurer that there was a new owner. Four months after
Shelia purchased the home, a windstorm damaged the roof. Which
of the following legal characteristics of insurance contracts could
the insurer use to legally deny payment for the damage to the
roof? Insurance contracts are_____________ Ans: Personal
Mae sues her former employer after she is fired for
insubordination. She wins her case and in addition to lost wages,
she is compensated for her feelings of inadequacy during the
interim. This compensation would fall in the category of Ans:
General damages
© 2025 All rights reserved
RMIN 2005 Final Review Questions and
Correct Answers
Insurance works because Ans: Of the affect of the Law of Large
Numbers
Assume you are comparing the riskiness of two risks your
organization faces: employee theft and products liability. Looking
at the past 30 years, the average annual loss for employee theft is
$25,000, for products liablility it is $7,000. The variance for
employee theft is $2,000 and for products liability, the variance is
$4,000. What two numbers will you use to most accurately
compare the riskiness of these two exposures? Ans: .08 for
employee theft and .57 for products liability
Private insurance is NOT designed to effectively protect insureds
against which type of risk? Ans: Fundamental
Frequency times severity is equal to Ans: Expected loss
The presence of the law of large numbers is critical to the success
of the business of insurance. Ans: True
You are comparing two different exposures to risk that your
business faces: your building burning and your building flooding.
Based on information you gather from your history and that of
similar nearby businesses, you calculate that your expected loss
for your building burning is $80,000 and the expected loss of your
building flooding is $12,000. The variance of your building
burning is $10,000 and the variance of flooding is $11,000. Which
exposure is riskier and why? (Choose the best answer) Ans:
Flooding because it has a higher relative variance
Who generally pays for fundamental risks (directly)? Ans:
Government
© 2025 All rights reserved
, 2 | Page
If you are risk averse about driving (select the best answer) Ans:
We can say that you have a higher subjective risk when you drive
Which of the following IS TRUE of the law of large numbers in
terms of loss exposures? Ans: It means that an insurance
company can more efficiently assume risk than individuals
Fundamental risk is diversifiable. Ans: False
Making certain that a catastropic loss does not force your firm into
insolvency is Ans: The post-loss objective of survival of the firm
Which two requirements of an insurable risk does satellite risk
most likely violate? Ans: Large number of homogeneous exposure
units and chance of loss should be calculable
Alex has a 5 year old car that was wrecked last month. He repairs
his car and gets indemnified from his insurer (less his deductible).
But now he wants to get a new car and sell his current one but he
can't sell it for as much he thought since it has been wrecked.
However, he discovers he can actually get as much for it from the
insurance company as he could have gotten before it was wrecked.
This most clearly Ans: Could result in a moral hazard loss
From the video, Dr. Berry noted that insurance companies have
developed many of these specifically to help risk managers and
business owners identify loss exposures for specific industries or
types of organizations. What are they? Ans: Survey form
Considering how aggressive or conservative an individual or
company is with respect to risk should be part of which step of the
risk management process? Ans: Setting your pre-loss objectives
The modern approach to risk management that focuses on
managing not only pure but also speculative risks is commonly
known as Ans: Enterprise risk management
© 2025 All rights reserved
, 3 | Page
Having your brakes inspected and maintained is, according to the
video, an example of which of the following? Ans: a. Loss
reduction
b. Loss prevention
Which method of identifying loss exposures can help the risk
manager identify specific property values of the firm and the
ability of the firm to retain risk? Ans: Financial statement analysis
What type of loss exposure is the loss of business income that
results from not being able to continue running your business
because of a fire? Ans: Property
To be the most conservative, companies would insure their
property (as close as possible) to what level of loss exposure? Ans:
The maximum possible loss
Bobby works for a lone shark and he wants to buy liability
insurance before going to"put the fear" into his boss's client. He
wants to protect himself from his boss's suing him for his medical
bills. His insurance agent tells Bobby that insurance is not
available for this risk because, in addition to the loss not being
fortuitous, there would not be Ans: Legal purpose
Jacob sold his house to Shelia for $140,000 in cash. Jacob threw in
insurance on the house as part of the deal and did not bother
telling the insurer that there was a new owner. Four months after
Shelia purchased the home, a windstorm damaged the roof. Which
of the following legal characteristics of insurance contracts could
the insurer use to legally deny payment for the damage to the
roof? Insurance contracts are_____________ Ans: Personal
Mae sues her former employer after she is fired for
insubordination. She wins her case and in addition to lost wages,
she is compensated for her feelings of inadequacy during the
interim. This compensation would fall in the category of Ans:
General damages
© 2025 All rights reserved
